During the past six months, the US Treasury, the US banking agencies, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have pursued several regulatory or enforcement initiatives relating to firms engaging in stablecoin activities. This article summarizes the key points of the following developments:
- the “Report on Stablecoins” (PWG Report) issued on November 1, 2021, by the President’s Working Group on Financial Markets (PWG), together with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC);1
- stablecoin-related enforcement activities of the SEC; and
- the CFTC’s enforcement order against Tether.
- PWG Report on Stablecoins
On November 1, 2021, the PWG, together with the FDIC and the OCC, published the PWG Report. The PWG is chaired by the Secretary of the Treasury and includes the Chair of the Board of Governors of the Federal Reserve System (FRB), the Chair of the SEC, and the Chair of the CFTC, or their designees (the agencies comprising the PWG, together with the FDIC and the OCC, are referred to in this report collectively as the Agencies).
The Agencies made specific recommendations to Congress with respect to (i) stablecoin issuers, (ii) stablecoin custodial wallet providers and (iii) other entities that perform activities that are critical to the functioning of the stablecoin arrangement.
If Congress were to enact legislation consistent with the Agencies’ recommendations:
- a stablecoin issuer2 would be required to be an insured depository institution (IDI) subject to the regulatory, supervisory and examination authority of a US federal banking agency – either the OCC, the FRB or the FDIC;
- stablecoin issuers would be subject to the consolidated supervision and examination authority of the FRB at the holding company level; and
- federal oversight of stablecoin custodial wallet providers would include authority to restrict wallet providers from lending customer stablecoins, and to require compliance with appropriate risk-management, liquidity and capital requirements.
The Agencies recommended that Congress provide the federal supervisor of a stablecoin issuer – i.e., the OCC, the FRB or the FDIC – with the authority to require any entity that performs activities critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards. If Congress were to enact legislation consistent with the Agencies’ recommendations, the U.S. banking agencies would have additional authority to regulate and examine third parties that perform activities critical to the functioning of the stablecoin arrangement.
The Agencies recommended that if Congress does not act, the Financial Stability Oversight Council should consider steps available to it to address the risks outlined in the PWG Report.3
- DeFi Arrangements and SEC Enforcement
Stablecoins are used to facilitate trading, borrowing and lending on digital asset trading platforms and in decentralized finance (DeFi) arrangements. Digital asset trading platforms and DeFi arrangements present investor risks of particular focus to the SEC to the extent they involve securities under US federal securities laws. According to a November 9, 2021, statement by SEC Commissioner Caroline Crenshaw, a variety of DeFi participants, activities and assets fall within the SEC’s jurisdiction, as they involve securities and securities-related conduct, but no DeFi participants within the SEC’s jurisdiction have yet registered with the SEC.4
One focus of the SEC’s enforcement actions has been DeFi arrangements. For example, according to Coinbase,5 it received from the SEC last summer a Wells Notice related to its crypto lending program called Lend. In response to allegations made by the SEC, Coinbase revised its plans to launch the program.
The SEC also recently settled an enforcement action with a DeFi platform and its two individual promoters. The SEC alleged they failed to register their offering, which raised $30 million, and misled investors.6 The SEC’s action resulted in disgorgement of $12.8 million and penalties of $125,000 each for the two individuals.
- CFTC’s Tether Order
On October 15, 2021, the CFTC issued an enforcement order against Tether Holdings Limited and certain of its affiliates (Tether), issuers of a US dollar tether token (USDt).7 The CFTC ordered Tether to cease and desist from violating Section 6(c)(1) of the CEA and Regulation 180.1(a)(2) and to pay a $41 million civil monetary penalty. In particular, the CFTC claimed that Tether had intentionally or recklessly made untrue or misleading statements of material facts and omissions of material facts, including representations that Tether would fully back USDt with fiat currency in accounts held in Tether’s own name; omissions regarding the actual backing of USDt including non-fiat assets, such as commercial paper; representations that Tether would undergo regular professional audits; and omissions regarding the pre- disclosed timing of one of the two reviews that Tether did undertake.
In the Tether Order, the CFTC made clear its view that the USDt, “a virtual currency stablecoin, is a commodity and subject to applicable provisions of the [CEA] and Regulations.”8 The CFTC is apparently staking its claim to anti-fraud and anti-manipulation enforcement authority over at least some cash market transactions involving virtual currency stablecoins.
1 President’s Working Group on Financial Markets, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, “Report on Stablecoins,” US Department of the Treasury (November 2021), available at https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf.
2 Stablecoin issuers would comprise issuers “that are domiciled in the United States, offer products that are accessible to U.S. persons, or that otherwise have a significant U.S. nexus.” PWG Report, p. 16, fn. 29.
3 PWG Report, p. 18.
4 Commissioner Caroline A. Crenshaw, “Statement on DeFi Risks, Regulations, and Opportunities” (Nov. 9, 2021), https://www.sec.gov/news/statement/crenshaw-defi-20211109.
6 See Blockchain Credit Partners d/b/a DeFi Money Market, Gregory Keough, and Derek Acree, Order Instituting Cease and Desist Proceedings, Securities Act Release No. 10961 (Aug. 6, 2021).
7 Tether Holdings Limited et al., CFTC Docket No. 22-04 (Oct. 15, 2021) (Tether Order), available at https://www.cftc.gov/media/6646/enftetherholdingsorder101521/download.
8 Tether Order, p. 8.